Institutional investors with big mouths can make big changes at a company. Five years ago, who would have thought that Apple Inc.
AAPL, -1.53%
would pay huge dividends and buy back tens of billions of dollars in stock? You can thank New York corporate raider Carl Icahn, who led the charge for the iPhone maker to act less like a tech startup and more like an old-line cash cow. Apple’s share count has declined 8% over the past year, raising its earnings per share — and stock price.

Activism can be very good for shareholders of industrial conglomerates, in particular. They tend to trail companies in other industries in metrics such as sales growth and profit margins.

Shares of E. I. du Pont de Nemours and Co.
US:DD
— known informally as DuPont — rose 5% Wednesday after Trian Fund Management LP said the chemical company, which is over 200 years old, should be broken up.

Trian, led by founder Nelson Peltz, had been talking with DuPont’s management for more than a year about various ways to boost performance. Then on Wednesday, Trian published a letter to DuPont’s board of directors, saying that although it was pleased with the spinoff of DuPont’s Performance Chemicals Segment, $5 billion stock-buyback plan and cost-cutting program, “these moves are not enough to optimize shareholder value.”

Trian then made a detailed case for splitting DuPont into two companies, one to include its Agriculture, Nutrition Health and Industrial Biosciences businesses, and another to concentrate on high-cash-flow businesses, including the Performance Materials, Safety, Protections, Electronics and Communications segments.

Those moves “could double the value of the common stock within three years,” Trian said. DuPont, it turns out, has greatly outperformed the S&P 500 with a total return of 220% since the end of 2008. The index has risen 144%.

To compile a list of large companies that might face similar action by activist investors, we began by looking at S&P 500
SPX, -1.42%
stocks with market values of at least $50 billion. We then narrowed the list to industrial conglomerates, diversified chemical companies, two household/personal care giants, and a diversified food and beverage conglomerate.

Here they are, along with comparisons of their last two full years’ profit margins, based on earnings before interest, taxes, depreciation and amortization (EBITDA), as calculated by FactSet:

10 major U.S. conglomerates

Company

Ticker

Market capitalization ($bil)

EBITDA margin - 2013

EBITDA margin - 2012

Margin change

General Electric Co.

GE

$263

23.36%

25.57%

-2.20%

Procter & Gamble Co.

PG

$228

22.96%

22.03%

0.93%

United Technologies Corp.

UTX

$99

16.57%

15.28%

1.29%

3M Co.

MMM

$94

26.01%

25.96%

0.05%

Honeywell International Inc.

HON

$74

18.37%

14.70%

3.67%

Dow Chemical Co.

DOW

$64

12.54%

11.90%

0.64%

E. I. du Pont de Nemours and Co.

DD

$60

15.82%

17.58%

-1.76%

Mondelez International Inc. Class A

MDLZ

$60

14.26%

15.85%

-1.59%

Colgate-Palmolive Co.

CL

$59

26.13%

25.79%

0.34%

Danaher Corp.

DHR

$54

22.30%

22.10%

0.20%

Source: FactSet

Their are many ways to measure profit margins, and we have used EBITDA to make a uniform comparison. What matters to investors is the direction of the margin over time.

The company with the best EBITDA margin improvement for 2013 was Honeywell International Inc.
HON, -1.04%
of Morristown, N.J. The company has four operating segments, all of which improved profits. One, aerospace, posted a slight decline in sales.

General Electric Co.’s
GE, -1.68%
2013 EBITDA margin declined the most. Still, the combined margin for its industrial units improved to 15.66% from 15.06% in 2012.

GE of Fairfield, Conn., has been shrinking its financial arm, GE Capital, for several years. But the stock has underperformed the S&P 500 by a wide margin over the past five years, possibly because the overall valuation of the company doesn’t reflect that of the individual divisions.

With that and CEO Jeff Immelt’s focus on energy infrastructure and technology in mind, GE last week agreed to sell its appliances business to Electrolux AB
ELUXB, -0.88%
of Sweden for $3.3 billion in cash. The deal followed GE’s $17 billion acquisition of Alstom SA’s energy business, and the sale of its 49% stake in NBC Universal to Comcast Corp.
CMCSA, -1.48%
in March.

Two other conglomerates on the list suffered shrinking EBITDA margins. One is DuPont, which said Wednesday that its talks with Trian had been “constructive.”

The second company with a drop in EBITDA margins is Mondelez International Inc.
MDLZ, -1.94%
of Deerfield, Ill., a snack and beverage manufacturer. The company’s brands include Oreo, Nabisco, Milka, Cadbury and Trident gum. Sales declined slightly last year to $9.49 billion, while the gross profit margin dipped to 36.8% from 37.4%.

This table shows changes in sales per share for the group, with all but one improving this measure during 2013:

Sales per share

Company

Ticker

Sales per share - 2013

Sales per share - 2012

Sales per share % change

EPS - 2013

EPS - 2012

EPS % change

General Electric Co.

GE

$13.85

$13.72

1%

$1.44

$1.35

7%

Procter & Gamble Co.

PG

$29.13

$28.54

2%

$3.74

$3.93

-5%

United Technologies Corp.

UTX

$68.46

$63.62

8%

$6.25

$5.46

15%

3M Co.

MMM

$44.51

$45.52

5%

$6.72

$6.32

6%

Honeywell International Inc.

HON

$48.99

$47.57

3%

$4.92

$3.69

33%

Dow Chemical Co.

DOW

$44.28

$48.27

-8%

$3.68

$0.70

426%

E. I. du Pont de Nemours and Co.

DD

$38.29

$37.17

3%

$3.08

$2.95

4%

Mondelez International Inc. Class A

MDLZ

$19.73

$19.57

1%

$2.19

$1.69

30%

Colgate-Palmolive Co.

CL

$18.53

$17.79

4%

$2.38

$2.58

-8%

Danaher Corp.

DHR

$26.89

$25.61

5%

$3.80

$3.10

23%

Source: FactSet

United Technologies Corp.
UTX, -0.88%
of Hartford, Conn., had the best sales growth. The company has a plan to simplify its operations, combining Otis and its UTC Climate, Controls & Security segments into UTC Building & Industrial Systems. The company has three other segments, including Pratt & Whitney, UTC Aerospace and Sikorsky, which makes helicopters.

The only company on the list showing a decline in 2013 sales per share was Dow Chemical Co.
US:DOW
of Midland, Mich, which reflected a 10% increase in the weighted average count of diluted shares, to account for the planned conversion of preferred shares to common shares. The company’s increased EPS reflected a $2.2 billion cash award resulting from the termination of Dow’s joint venture with Petrochemical Industries Co. (of the state of Kuwait). On an adjusted basis, Dow said its 2013 EPS came in at $2.48, rising from $1.90 in 2012.

The following table shows the forward price-to-earnings ratio for the 10 conglomerates, as well as five-year total returns, assuming dividends were reinvested.

For comparison, the S&P 500 has returned 108% over the past five years and trades for 15.1 times aggregate consensus 2015 EPS estimates among analysts polled by FactSet. The Dow Jones Industrial Average
DJIA, -1.35%
trades for 14 times forward EPS estimates.

Price to earnings

Company

Ticker

Closing price - Sept, 17

Consensus 2015 EPS estimate

Forward P/E

Total return - 5 years

General Electric Co.

GE

$26.27

$1.81

14.5

76%

Procter & Gamble Co.

PG

$84.16

$4.81

17.5

77%

United Technologies Corp.

UTX

$108.03

$7.50

14.4

94%

3M Co.

MMM

$145.37

$8.30

17.5

120%

Honeywell International Inc.

HON

$95.54

$6.17

15.5

169%

Dow Chemical Co.

DOW

$54.15

$3.55

15.3

139%

E. I. du Pont de Nemours and Co.

DD

$69.25

$4.67

14.8

145%

Mondelez International Inc. Class A

MDLZ

$35.42

$1.92

18.4

133%

Colgate-Palmolive Co.

CL

$65.24

$3.27

20.0

99%

Danaher Corp.

DHR

$78.73

$4.12

19.1

132%

Source: FactSet

Six stocks have beaten the total return of the S&P 500 over the past five years. That’s not a bad showing for any group of 10 stocks. The worst performer has been General Electric, but even that stock’s average annual return has been over 15% during the period.

So these mature companies aren’t likely to begin posting stellar growth. They aren’t home-run plays, but they sure have been profitable. All 10 are trying very hard to become more efficient. Looking ahead, it’s quite possible that activist investors will follow Trian’s approach with DuPont and unlock more value for all shareholders.

Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.